Asset Pricing in the International Economy
IMF Working Papers, February 1, 1993
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Bibliographic details
- Authors: José M. Barrionuevo
- Published: February 1, 1993
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451843187.001
Summary
- Presents a statistical and economic interpretation of the low and often economically implausible risk aversion estimates obtained for fixed income assets throughout the finance literature.
- Statistical interpretation: Monte Carlo simulations demonstrate that specification errors introduce a serious downward bias in parameter estimates derived from the standard asset pricing model.
- Economic interpretation: An international version of the asset pricing model is presented, suggesting that by reducing the effect of country specific disturbances, an international measure of consumption growth yields more accurate risk aversion estimates than a national measure.
- Empirical results: Asset pricing tests indicate that risk aversion estimates derived from models constructed for the international measures are economically plausible and close to each other across eight industrialized economies.
- Robustness: These results are robust for several asset returns.
Methods and Technical Approach
- Monte Carlo simulations used to evaluate the statistical properties of parameter estimates under specification errors.
- Construction and estimation of an international version of the asset pricing model to isolate and reduce country specific disturbances.
- Comparative estimation using national versus international measures of consumption growth.
Key Findings and Quantitative Results
- Specification errors in the standard asset pricing model introduce a serious downward bias in estimated risk aversion parameters (demonstrated via Monte Carlo simulations).
- International measures of consumption growth produce more accurate risk aversion estimates by reducing the influence of country specific disturbances.
- Risk aversion estimates from international-model specifications are:
- Economically plausible.
- Close to each other across eight industrialized economies.
- Findings hold across several asset returns (robustness reported).
Subjects and Keywords (as listed)
- Subjects: Asset prices, Consumption, Econometric analysis, Estimation techniques, Financial institutions, National accounts, Prices, Return on investment, Treasury bills and bonds
- Keywords: Asset prices, asset pricing estimation, Consumption, consumption growth, estimation procedure, Estimation techniques, growth measure, growth model, least squares, Return on investment, risk aversion, risk premium, Treasury bills and bonds, WP